Election Thoughts IV: Income Inequality


In my previous post (https://medium.com/@ericsimon_82337/election-thoughts-iii-economy-backlash-3896f0bc0386#.yjt572pd3), I discussed how Clinton emphasized Trump’s unfitness to serve as President, highlighting all his foibles while not building a coherent narrative or rationale for her own candidacy. In the end, this strategy made Clinton wholly dependent on a pliant news-cycle that would highlight Trump’s troubles. When the news-cycle changed or Trump became more self-disciplined, Clinton had little to fall back upon.

And that did not need to be. Clinton could have focused more on the economy. Indeed, she should have realized early on that the economy and specifically income inequality — and not identity based issues or some perpetual cultural war — would define the election. Instead, she played far more towards cultural and identity issues. Tellingly, one of her only breaks from her torrid August fundraising was to make a speech denouncing the “alt-right” — not the economy. Many people have never heard of the “alt-right” — which is an esoteric term to begin with — but they surely understand their economic well-being and can feel an ever-widening gulf between themselves and the super-wealthy.

To me, ever widening income inequality poses one of the biggest challenges for our country — mainly because it encapsulates not just economic, but cultural frustrations. It accounts for people’s resentment and mistrust of establishment institutions. It strangles mobility, leading to a certain sense of hopelessness on people’s part. And that hopelessness then animates groups like the Tea Party (and also Fox News and Brietbart) that prey on people’s resentment.

No wonder, people can sense a rigged system. Spend time in Dutchess County, NY (near where I spend weekends) — home to rambling horse estates in Millbrook that evoke an equine Hamptons — and also the place of absolute squalor in “Oniontown”http://i95rock.com/a-rare-look-into-the-mysterious-oniontown-video/. Driving through Oniontown, it’s easy to see why people might feel forgotten and look yearningly at Trump as a savior.

But, do not take it from me — an armchair quarterback so to speak. In the years leading up to 2016, income inequality — and the dis-function it spawned — had become something of a cottage industry. Take Charles Murray’s Coming Apart about the disintegration of white working class communities or George Packer’s The Unwinding about the shrinking middle class. Most recently, J.D. Vance has attracted a lot of attention with Hillbilly Elegy: A Memoir of a Family and Culture in Crises. In magazines, The Atlantic’s Derek Thompson has written some stirring pieces on the repercussions from income inequality and globalization — notably A World Without Work (A World Without Work ) and The Free Time Paradox (The Free-Time Paradox in America ). Threading through all these publications is the notion that that income inequality has some nasty side-effects — that are cultural as well as economic in nature.

If Clinton’s campaign had not stayed current with literature, it should have still seen the tea leaves from the primaries. On the Republican side, Trump — thrice married and no paragon of virtue (even pre-Access Hollywood) in a party that revolved around moralism — dispatched 16 other candidates through appeals to a working and forgotten class. Many of those defeated — Huckabee, Santorum, Cruz — had built their campaign around the once all-important cultural issues, a sure sign that economics — not cultural issues — mattered most to voters.

Meanwhile, on the Democrat side, Bernie won with a message built exclusively around the “Billionaire Class” and “the grotesque level of income and wealth inequality.” Indeed, Bernie appeared to disdain any traditional niceties of personal biography or character — prompting him to ignore the “damn emails” — in order to double down on income inequality. With this message, Bernie continually won working class and rural voters — the same voters who had sided with Hillary in 2008 against Obama.

The media loved to focus on the “Bernie Bros” and millennial generation feeling the Bern at college campuses across the country. But, there are only so many 20 something “Bernie Bro” males sporting beards, suspenders and vintage flannel suits. Bernie’s victories in “rust belt” states like Michigan, Wisconsin, New Hampshire, Oklahoma, West Virginia, Indiana — and closeness in many others — came from his dominance outside the metro areas — where these ironically clad young men do not reside. Even in Clinton’s home state of New York — the place where as senator she would tromp through upstate counties on “listening tours” — Clinton lost outside the NYC metro area: she won the NY State primary by 291K votes (16%), which was less than her margin of 309K votes in NYC/Westchester/Nassau.

Bernie and Trump really had only one villain for the economy — bad trade deals. This myopic and simplistic view of the world offered Clinton an opportunity if she had thought imaginatively and boldly enough.

That is because NAFTA cannot serve as the “bogeyman” for all the problems bedeviling people. NAFTA doesn’t stop a company from sending its IT department to India; from businesses deciding to plow new investments into emerging markets where they see larger upside; from a coal company going bankrupt because the price of coal has made mining unsustainable; or from oil field service companies deciding to lay-off workers in a world of $40/barrel oil. Nor can any trade policy counteract people’s insatiable quest for the cheapest possible goods — a desire that has driven WalMart and others to develop elaborate supply chains into China (or now has caused Amazon to supersede all physical retailers and hollowed out once teaming malls) .

Indeed, one can easily develop a laundry list of the factors driving income inequality — keeping the working class down and the “Billionaire” class high. Here are some quick culprits:

1) Network effects combined with technological platforms create hugely valuable businesses that have very few employees. For instance, Facebook has a market cap of ~$365B, but employs less than 13,000 people. Snapchat might go public next year at a ~$20B valuation, yet last year (when the company was worth $15B) only ~330 employees ambled around the company’s Venice Beach bungalows. Contrast this to old-line businesses (e.g. telecom, airlines, retailers) that employ hundreds of thousands. The cherished few who work at these technology businesses can make a substantial amount of money relatively speaking — particularly when it comes to stock-based compensation. Trouble is, not many people work at these places.

2) Automation dis-intermediates a slew of jobs. This trend does not just occur in Silicon Valley, but in every white collar office where executives need fewer assistants; stores where self-serve scanners check out shoppers; fulfillment centers where robots do the job of packing-and-sorting; HR departments where algorithms can quickly evaluate a resume; and airlines where software can rebook thousands of passengers instantaneously.

3) A failing education system that results in too few potential employees having the bare minimum in quantitative and computer literacy.

4) Deregulation that has led to fiercer and more fluid competition. It begets larger, scaled businesses through M&A that can rationalize jobs while generating bigger profits for senior executives and investors.

5) Skyrocketing rents in marquee cities that leave many locked out from potentially high paying jobs in technology, bio-tech and finance. For the 1st time in our history, people are leaving the big job creating cities, forced out by unsustainable living expenses. It’s as if Caroline in Theodore Drieser’s Sister Carrie ditched Chicago to move back to rural Wisconsin. Such a trend leads to self-segregation and a two-tiered populace — not around race, but around affluence — and spirals downward into a viscous cycle.

6) Easy accessibility of everything from entertainment to talent to e-commerce. People no longer need to settle for 2nd best whether it be with DVDs, potential employees or clothes. A “winner takes all” dynamic emerges, showering riches on a few businesses or people — while leaving others shut out. It explains the increasing dominance of a few mega-companies in the technology space— Facebook, Google, Apple, Amazon and Microsoft — built on network effects and robust technology platforms.

Note, not any of these drivers relate directly to globalization (although that is surely a factor) and trade. Do away with trade deals and kill NAFTA: these trends would still continue unabated.

A few years ago, I saw some of these forces firsthand when I visited a refinery south of Philadelphia as part of a due-diligence effort for an acquisition (interestingly enough, the Philadelphia area serves as the regional refining hub with ~5 refineries). Refineries, in a way, can isolate the impacts of globalization: while the U.S. imports a lot of oil, 90% of our gasoline gets refined in the U.S. (e.g. we import oil to get refined domestically). Likewise, all — or almost all of this refinery’s output got consumed in the U.S. In short, foreign trade does not pose a major threat to refineries.

But, this little detail does not stop significant changes sweeping through refineries. On our visit, we peered into the control room. I didn’t know what to expect, but I probably envisioned a control room teaming with activity and people. Rather the control room was a rather sedate affair with a few people peering at big, Bloomberg like monitors and a treadmill off to the side that I guess was used during breaks. Just as remarkable, the control room was manned entirely by young workers with presumably limited tenure. This struck me as odd: on a cold, raw November day along the Delaware River, the control room offered the cushiest and safest job by far. And in unionized workplace, the most senior employees — and there were many old workers who had spent their entire career at the refinery — get the pick of the litter job-wise.

Trouble is, many of these older employees couldn’t do the work demanded in the control room. To be sure, nothing in the control room required advanced mathematics — this wasn’t a hedge fund trading floor. Doubtful that any of these younger workers even had a college education. But, they did have an understanding of computers (potentially learned through video games) and basic quantitative reasoning –skills that the older workers did not possess.

In short, then, this Philadelphia refinery, automation had resulted in fewer jobs needed in running day-to-day operations. At the same time, education failures meant that many workers did not have the skills to take the best jobs. These issues existed totally independent of NAFTA or Obama’s ability to strike good trade deals or TPP.

Clinton could have seized upon these examples and called Trump’s bluff. Instead of reciting a litany of thread-worn Democratic talking points that came across as a laundry list, Clinton could have fused her proposals into a cohesive story. Potentially risky, but she could have leveled with people — in the way that voters claim they want their politicians to talk to them.

She could have said that ripping up all trade deals ever written would not bring many of these jobs back. Trump wanted people to think it was just trade holding people back because foreigners represent easy targets. But, in truth, a whole host of factors — housing costs, education, technology, too much deregulation, a new economy — had conspired to hurt the working class and create income inequality.

She then could have unveiled concrete proposals to address these trends. Preferably, Clinton would have laid out her proposals in Rust Belt states — Michigan, Wisconsin, Ohio, Pennsylvania — in front of factories and state fairs. And she might have served up these proposals during August — when she was otherwise occupied at fundraisers — in order to drive the conversation during the fall campaign.

Often, it all gets to the packaging. In 1994’s Contract with America, Newt Gingrich didn’t necessarily come out with drastically new proposals — Republicans had advocated balanced budgets, tough-on-crime legislation, tax reform, tort reform and reduced regulations for a long time. But, the Contract with America felt novel due to its specificity, its focus on action and its over-arching branding.

In 2016, Trump did the same thing. He took tired old protectionist, America first policies — propagated under unsuccessful candidates like Perot and Buchanan — and fastened them onto a compelling moniker — “Make America Great Again”, itself a 36 year old slogan. Clinton had the opportunity to address many of the same problems Trump had identified — income inequality, the hallowing of the working class — but in a more comprehensive way. She could have offered her own Contract — contracts aren’t exclusive to the Republican Party — that made her policy proposals relevant to today’s issues and concerns.

But, she did not. Instead she spoke about Trump’s unfitness for office; pivoted to social issues divorced from economic concerns; and focused heavily on new emerging voting blocs. In the end, though, she under-performed Obama among almost all constituencies. As one of husband’s strategists would put it “It’s the economy stupid.”

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